Opening Address for Dinner-Debate - European Parliament

Opening Address by Mr. Mohammed Barkindo, Acting for the OPEC Secretary General, at a Dinner Debate, European Parliament, Strasbourg, France, 4 July 2006

[Slide 1]Excellencies, ladies and gentlemen,

The good thing about dinner-debates is that they provide both physical nourishment and intellectual nourishment — and so there has been a double reason for me to travel to Strasbourg today! One might even add “sporting nourishment”, with the European Union providing all the teams for World Cup semi-finals! Let me, therefore, thank the organisers for inviting me to address you here at the European Parliament today, on behalf of OPEC, and for providing this further opportunity to exchange views between our two intergovernmental groups.

In a way, this evening’s dinner-debate can be viewed as the latest chapter in the EU-OPEC Energy Dialogue, which, as you know, was established in Brussels a year ago and began producing tangible results almost immediately. Already there is a much clearer understanding of the respective views of the two sides on many important energy issues.

We have believed, in OPEC, for a long time that an effective and sustained process of dialogue is essential to the future of the industry. Other exchanges in which we are actively involved, both formally and informally, bear witness to this, such as, most recently, with China, Russia and the United States of America. A common theme in these discussions is energy security, and there is now a general view that this must be a shared responsibility — as indeed witnessed by the theme of the recent Tenth Meeting of the specialist high-level producer-consumer body, the International Energy Forum. Energy security will also feature prominently at the G8 meeting Moscow later this month. It is clear from your decisions and actions, as well as your Green Paper on a European Strategy for Sustainable, Competitive and Secure Energy, that a similar outlook prevails in the European Union.

[Slide 2] Since time is short and the landscape for discussion large, I shall move straight on to the current outlook in the international oil market. I shall gradually shift the focus to more-distant horizons, up to 2025, and then look at important related issues, such as energy security, the environment and the eradication of poverty. On the way, I shall provide some observations about your Green Paper in the spirit of dialogue between our two groups and, notably, our jointly expressed interest in stable, transparent and predictable oil markets.

[Slide 3] Turning to the current oil market outlook, let me state quite clearly that OPEC is always concerned about price volatility, as well as prices that are too far removed from market fundamentals. Prices that are too high will drive people away from oil, while prices that are too low will provide inadequate revenue for investment in future capacity. Volatility, in itself, is the enemy of sound investment strategies, on top of its other disruptions to our day-to-day lives. Nevertheless, we should note that, while nominal prices reached record levels earlier this year, in real terms, prices are still well below levels seen in the early 1980s, when OPEC’s Reference Basket would have reached US $85 a barrel, at today’s prices. Also, there has been a strong increase in non-energy commodity prices over the last two years, sometimes at rates greater than that of oil.

[Slide 4] The present volatility has a number of causes.

[Slide 5] First, oil demand growth has been exceptional. Fuelled by high economic growth, global oil demand surged in 2004 by 3.0 million barrels a day, a level of demand growth not seen since the early 1970s. This moderated somewhat last year, with demand growing by just under 1 mb/d, although the level has risen again slightly since then.

[Slide 6] There has also been tightness in the downstream sector, which has been putting pressure on not just product prices, but also crude prices. In three key regions of the world — Asia, Europe and the United States — refineries have been operating at 90 per cent of capacity and above for much of the time. There is also a lack of capacity to process heavier sour crudes, causing the differentials between crude grades to increase. Factors behind this have been a lack of timely investment in the downstream sector and increasingly stringent product regulations motivated by environmental concerns.

[Slide 7] Also influencing price movements has been increased activity in the futures market, with a new inflow of capital movements by hedge and pension funds. Indeed, open interest contracts in the NYMEX passed the one million mark for the first time in April, with volumes almost doubling since 2003 — this is more than ten times the total oil supply in the world physical market at the present time. Total assets under management by hedge funds are estimated to be in the region of $1.5 trillion. There is much discussion about the effect of all this on oil market volatility and rising prices, and this is why, as part of the EU-OPEC Energy Dialogue, we shall be meeting in December to examine the impact of financial markets on oil prices.

Add to this mix natural disasters and uncertainties stemming from geopolitical developments and it is understandable why there is so much volatility at the present time. Last year, for example, Hurricanes Katrina and Rita initially removed 1.5 mb/d of oil from the market, and, even now, ten months later, around 200,000 b/d are yet to come back on-stream.

[Slide 8] In response to all this, our Member Countries have increased production by around 4.5 mb/d since 2002. As a result, there have been no actual supply shortages; [Slides 9 and 10] indeed, recently, stocks have increased to levels above their five-year average in the OECD, particularly in the USA. [Slide 11] And, where possible, our Member Countries have accelerated their plans to bring on-stream new production capacity to meet continued demand growth and re-establish a comfortable cushion of spare capacity. This has been in spite of the current high costs in the industry, which in turn have arisen, at least in part, from shortages, especially in services and human resources, following the period of low prices witnessed in the not-too-distant past.

With OPEC’s upstream capacity on course to rise to around 33 mb/d by the end of the year, against an expected average output of 28.6 mb/d for the year, our spare capacity should exceed ten per cent, a level which past experience has shown to be very comfortable for the market. Moreover, with more than 100 projects in the execution or planning stage in Member Countries, totalling over 11 mb/d of gross production of oil and other liquids, OPEC’s policy has ensured that this trend of ample production and sufficient spare capacity will continue.

This demonstrates OPEC’s commitment to ensuring that consumers receive their oil in an orderly, timely and efficient manner, as and when they need it and at fair and reasonable prices.

Our Member Countries have also increased investment in downstream projects, on their own and in partnership with others. Present estimates show that this will result in, at least, 2.5 mb/d of additional refinery capacity by 2010, with more being considered. However, this does not escape the fact that downstream investment is primarily the responsibility of consuming countries, and that the indications are that this sector could remain a key source of price volatility for some time to come, with expansion lagging behind demand growth. [Slide 12] Also, as with the upstream, this has been happening during a period of high costs. As you know, a joint EU-OPEC study will be begun soon on investment needs in the refining sector and the role of the refining industry in oil markets.

[Slide 13] When looking further into the future, over the next 20 years, OPEC shares the view of most analysts that energy supply will continue to rely primarily on fossil fuels, underpinning socioeconomic development throughout the world. With regard to renewables, while these constitute an important option that needs to be developed at every opportunity, in reality, there are still many hurdles to overcome. It is likely to be decades before renewables acquire a significant share of the world energy mix.

Oil is expected to retain the leading position in meeting the world’s growing energy needs, accounting for close to 40 per cent of energy demand over the next two decades, according to OPEC’s latest reference case projections.

This scenario forecasts a 30 mb/d rise in demand by 2025, to reach 113 mb/d. The transportation sector will be the main source of future oil demand growth, while developing countries, especially from Asia, are set to account for four-fifths of the rise. There are clear signs of a shift in the centre of gravity of the global economy and, hence, energy demand. Prime movers, in this respect, have been China and India, with their huge populations and rapid economic growth, as well as competitive labour and other production costs. On top of this are challenges created in an increasingly globalised economy by urbanisation, especially in developing countries, and ageing populations, particularly in wealthier societies. However, in spite of all this, by 2025, OECD countries will remain the dominant oil consumer and will continue to use, on average, five times more oil per person than developing countries.

[Slide 14] As is widely recognised by knowledgeable and reputable organisations, the global resource base is sufficient to deal with the forecast increases in world oil demand. Estimates of global ultimately recoverable reserves for conventional oil have been increasing, due to such factors as technology, successful exploration and enhanced recovery from existing fields. In addition, there is a vast resource base of non-conventional oil to develop.

[Slide 15] In the medium term, non-OPEC supply has the potential to rise substantially, with growth projected at 6 mb/d in the present period of 2005–10. However, it is eventually expected to reach a plateau after 2015, at 58–59 mb/d.

In the longer term, therefore, it is expected that OPEC, with nearly four-fifths of the world’s proven crude oil reserves, will be relied upon to supply most of the incremental barrel of demand. Nevertheless, by 2025, non-OPEC countries will still account for the larger part of world oil production, and they will continue to play a central role in meeting world oil demand.

[Slide 16] OPEC’s willingness and ability to supply the incremental barrel demonstrates the seriousness it attaches to energy security. Indeed, we have no difficulty in recognising the concern of consuming countries over security of supply. But the need for enhanced energy security has to be seen from both the supply and demand perspectives. Security of supply and security of demand are mutually supportive. Uncertainty over future demand translates into large uncertainties over the amount of oil that OPEC Member Countries will eventually need to supply, signifying a heavy burden of risk. Investment requirements are very large and subject to long lead-times and pay-back periods. With more transparency in the evolution and implementation of policies, better assessments can be made to undertake the appropriate capacity expansion and not waste precious financial resources.

[Slide 17] Uncertainties over future oil demand translate into a wide range of possible levels of necessary investment in OPEC Member Countries. Even over the medium term to 2010, there is an estimated range of uncertainty of $50 billion for required investment, increasing to $140 bn by 2015 and as much as $240 bn by 2020.

[Slide 18] The issue of security of demand is, therefore, a genuine one. And, while I am on the subject of security, I should like to make some observations about the Green Paper, which we welcome as timely, and an excellent platform for sharing views, ideas and visions.

First of all, we believe that a successful European energy policy should have a clearer understanding of the interests of the countries outside Europe, both suppliers of energy and consumers — indeed, the Energy Dialogue is already making progress in this respect. While the Green Paper emphasises the EU’s growing energy import dependence, we prefer to look at the overall situation as being one of interdependence, rather than dependence. A general principle of the Green Paper is security of energy supply. Nevertheless, as I noted earlier, security of demand is also essential, and the uncertainty over future demand, which is also affected by changes in energy policy trends, is a key concern for OPEC. Some of the proposed actions contained in the Green Paper clearly exacerbate this concern. For example, the implementation of provisions relating to energy taxes and domestic subsidies could discriminate heavily against oil, which would clearly interfere with the market and distort competition. The Green Paper does not address the importance of investment in the oil downstream sector, particularly in refining, nor the need for measures to improve the investment climate for refinery expansion and operations. Another important topic discussed within the EU-OPEC Dialogue is the impact of financial markets on commodity prices; it would have been useful to have included this issue within the Green Paper. But OPEC welcomes the emphasis the Green Paper places on carbon capture and storage (CCS).

[Slide 19] Indeed, a key question is whether the increasing use of fossil fuels is consistent with the protection of the environment, in particular regarding concerns over possible climate change, where technological options that allow the continued use of oil and gas in a carbon-constrained world must be considered. One promising example is CCS, applied to large stationary sources of CO2 emissions, such as power stations and industrial sites, which account for over half the energy-related CO2 emissions. CCS can also be used in conjunction with CO2 enhanced oil recovery, which offers a win-win opportunity by not only storing CO2, but also increasing oil reserves in mature fields. If CCS is to be used on a scale that would make a significant impact upon net CO2 emissions, it could develop into a significant business opportunity for the oil industry, and here we see great potential for cooperation between EU and OPEC countries. However, we also believe that that EU and other developed countries should take the lead in the area of providing cleaner oil and gas technologies by promoting large-scale demonstration projects, including the use of the clean development mechanism in accordance with the principle of common but differentiated responsibilities and respective capabilities. To this end, we look forward to the joint conference of CCS in Riyadh on 21 September.

[Slide 20] Clean and safe energy is also a vital requirement for developing countries as they seek access to modern energy services in their often protracted struggle for socio-economic development, sometimes from a state of extreme poverty. Without outside assistance, many appear to have no means of escape from the poverty trap. We are constantly mindful of the fact that poverty eradication is the first UN Millennium Development Goal, and a comprehensive and balanced approach to implementing the three pillars of sustainable development — economic growth, social progress and protection of the environment — is required. Energy security applies to all nations of the world, and the eradication of energy poverty demands urgent attention. All of us in this room are, of course, already aware of this, and it has an acknowledged role to play in the EU-OPEC Energy Dialogue, which refers explicitly to contributing to meeting the broader challenges facing mankind.

Excellencies, ladies and gentlemen,

The challenges facing all of us in the energy industry are formidable. However, there is already much common ground between the EU and OPEC with regard to fundamental issues regarding oil matters and this has been enhanced by the early achievements of our Energy Dialogue. It would be heartening to all of us if such multilateralism could be translated onto the global stage, addressing broader-based issues, enhancing the role of such global agencies as the United Nations and fostering peace and prosperity in all regions.

Finally, I hope that, during this address, I have managed to introduce many ideas that will help stimulate a lively and edifying debate.